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This Just In: Upgrades and Downgrades

Deutsche dishes dirt on fertilizer fans.

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...Is it time to buy PotashCorp(NYSE: POT) and Mosaic(NYSE: MOS), fertilizer fans? Not according to Deutsche Bank. As trading wound down at the end of last week, the Teutonic megabanker weighed in with a series of "initiations" of coverage on three of the biggest names in fertilizer. It's verdict:

Let's go to the tapeNow historically, Deutsche has been best known as an oil stock analyst. Within the oil patch it has picked winners such as XTO Energy(NYSE: XTO) and Occidental Petroleum(NYSE: OXY). But Deutsche's no slouch in the chemicals sector either. While it's not right on every pick, of course, its losers tend to lag the market only slightly:

In contrast, when Deutsche makes a bet and it pays off, it can pay off big:

Companies

Deutsche Says:

CAPS Says:

Deutsche's Picks Beating S&P By:

Praxair

Outperform

*****

53 points

Lubrizol

Outperform

**

102 points

Best of all: Over the past three years that we've been tracking Deutsche's progress in this sector, the analyst has managed to beat the market nearly twice as often as it lagged. Superb.

Superb news for Agrium investors, that is. I'm not sure that Deutsche's performance is going to win it any friends among PotashCorp or Mosaic shareholders. (Nobody likes a know-it-all, especially when he's panning your stock.)

Dishing the dirtBut here's the good news: Deutsche doesn't actually hate PotashCorp and Mosaic. To the contrary, Deutsche praises the former for its "No. 1 position in potash (83% of 2010E gross profits), No. 3 in phosphate and No. 3 in nitrogen." It calls potash "the best fertilizer business due to a superior market structure, high barriers to entry, limited government involvement and high relative growth rate," and says PotashCorp is capitalizing on these advantages to make "an even better business."

Problem is, PotashCorp shares currently sport "absolute and relative P/E valuations which are modestly above historical averages," and today look only "fairly priced" -- i.e., not a bargain. Deutsche has similar objections to Mosaic, which it also calls "fairly priced." (Of the two, Deutsche gives Mosaic slightly higher marks, inasmuch as its "balanced portfolio" of potash and phosphate production help the stock to "perform with less volatility than PotashCorp.")

In all things, moderationAnd balance lies at the heart of Deutsche's Agrium analysis as well. Deutsche respects Agrium's position as the "leading North American retailer of agricultural inputs." What excites the banker most about Agrium is the company's dominant position in the market at "900 US retail centers ... 3x its nearest rival," and the fact that it boasts "a full range of seed, fertilizer, chemical, and advisory services," thus giving it "greater diversity and margin stability" than its rivals, "lessening dependence on any one product or price" as well as "unparalleled real-time insight into U.S. grower economics and behavior."

Last but not least, Deutsche praises Agrium's "strong balance sheet and cash flow," both of which "further bolster the margin of safety."

I agree. And in fact, I'd go a bit further. Selling for 29 times trailing earnings, Agrium is clearly the cheapest of the three major fertilizer plays. Moreover, analysts on average expect the company to post 15% earnings growth over the next five years, only a skosh short of PotashCorp's growth rate, and considerably faster than Mosaic.

To top it all off, Agrium boasts the best price-to-free cash flow ratio in the fertilizer space. Over the past 12 months, this company has churned out a simply enormous pile of cash -- $1.1 billion in total, or nearly three times its reported net "profits" under GAAP. This has the stock trading for less than 10 times free cash flow -- a bargain relative to its growth rate.

Foolish takeawayDeutsche Bank didn't become one of the world's leading chemical company experts by chance. These folks know a bargain when they see it -- and they see it in Agrium.

I do, too.

The Fool owns shares of XTO Energy, butFool contributorRich Smithhas no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 671 out of more than 150,000 members. The Motley Fool has adisclosure policy.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.